Macroeconomıc Theory (ENG) — Ünite 3 Soru-Cevap

Because money affects the level of output and income.

A bond is a promise to pay an agreed amount of money to its holder at some future date. It is a documentation of indebtedness that specifies the obligations of a borrower to a holder of the bond.

Both governments and firms issue bonds to get a loan from the public.

The value of a bond depends on its maturity, face value, and coupon payments.

Maturity is the length of time until the bondholder is paid the fixed amount of money, which is the face value.

A coupon payment is an occasional payment to the bondholder.

If the bonds have one single payment at maturity, they are called discount bonds.

Buying and selling bonds actually involve transaction costs, such as calling your broker or going to the bank to realize these transactions.

Financial markets can be defined as any platform where financial products, such as money, stocks, bonds, foreign currencies, and commodities, are traded.

The primary function of any financial market is to channel funds from savers to investors who are in need of funds.

Financial markets enable investors to allocate their funds across time, such as taking credit to have higher education as well as across different states of the economy, such as investing in stocks or bonds.

We use money in our everyday lives quite often, generally to describe an economic activity, such as making money, earning money, spending money, or saving money.

Expression indicates that the bond price is equal to the present value of its future payment.

No. Because rise in interest rates renders existing bonds less attractive and their value falls. Alternatively, whenever the price of bonds increases, the interest rate falls. As a result, the price of bonds and interest rates are inversely related.

Holding money depends on the expected price and interest changes, uncertainty, or liquidity services that money provides.

According to Keynes, people hold money because of three main motives: Transactions motive, Precautionary motive, and Speculative motive.

Transactions motive: Individuals need money for their current transactions of personal and business expenditures. Individuals hold transaction balances to facilitate transactions because payments and receipts are not perfectly synchronized.

Precautionary motive:

a) People hold money to cover unforeseen expenses, as well as unanticipated opportunities to make profitable purchases.

b) Individuals hold an asset the value of which is fixed in terms of money. Money balances kept as a precaution against the uncertainty of the timing of cash flows are known as precautionary balances.

Speculative motive: The individuals hold money to secure profit and avoid losses, according to their expectations about price and interest rate changes. People keep speculative balances as a safety net against the uncertainty of financial asset prices, particularly bond prices.

The cost of holding money is the foregone interest earnings on bonds that the individual could have acquired.